The Australian Government moved swiftly to offer businesses and homeowner occupiers financial relief in the early stages of the COVID-19 pandemic yet fell short of making meaningful policy changes for investment property owners. This left many feeling that they had received the short straw.
These feelings may be valid, but it’s important to remember that well-established depreciation incentives already exist for residential property investors. They relate exclusively to plant and equipment assets and can boost cash flow by maximising tax deductions.
In this article we will review:
- Immediate deductions
- Ensuring all immediate deductions are compliant
- Low-value pooling, low-value vs low-cost
- Low-value pooling and immediate deductions and strata properties
The ‘immediate deduction’ is a straight-forward incentive for residential property investors. It allows them to immediately deduct any asset that costs $300 or less.
Since the immediate deduction rule came into effect in 2001, some assets commonly seen at BMT under this category include light fittings, security cameras, exhaust fans, small appliances and furniture.
Ensuring all immediate deductions are compliant
Assessing the eligibility of claiming the immediate deduction of assets is part of preparing a tax depreciation schedule. When analysing a property through physical site inspections and relevant documentation, we ensure all immediate deduction tests are met. Here is an overview of each step with common scenarios we see.
$300 or less
An asset’s cost must always be under the $300 threshold. However, assets over the threshold that are owned by multiple investors may entitle some to claim the immediate deductions.
For example, if two investors owned equal shares in a rental (50:50) and purchased a ceiling fan worth $500 both could claim the immediate deduction. This is because each investor owns a 50 per cent portion of the asset, coming to $250.
Not part of a set
Assets that are part of a set aren’t eligible for the immediate deduction. This is always determined on a case-by-case basis and assets may be deemed as a set if they are either:
- Interdependent on each other
- Marketed as a set
- Designed and intended for use together.
Common examples of sets include a bed ensemble where the total for the base and mattress is over $300, or a dining table and chairs where the combined total of the parts is over $300.
Assets deemed as substantially identical can’t be claimed as immediate deductions. If a group of assets are deemed as substantially identical but the total cost of the group is under $300, the investor could claim the immediate deduction.
When conducting a site inspection, we factor in the make, model, colour, shape, function, brand, design, texture and composition of each asset to conclude if it meets this test. Substantially identical assets would also need to be purchased in the same financial year.
Some examples would include five identical bar stools that are $100 each or four sets of window blinds worth $200 each.
Assets eligible for this particular immediate deduction must be used for the purpose of producing assessable income that is not income from carrying on a business. While assets in residential properties often meet this test, there are some unique scenarios where they may not. There are other rules that will apply to the immediate write-off associated with business assets
Low-value pooling, low-value vs low-cost
Many assets we find that aren’t eligible for the immediate deduction are placed in the low-value pool.
Allocating assets to the low-value pool is key for investors to accelerate deductions in the earlier years of ownership. Both low-value and low-cost assets falling under the $1,000 threshold can be allocated to the pool.
For example, a piece of furniture worth $300 which isn’t eligible for the immediate deduction as it’s deemed as substantially identical, could instead be placed in the pool.
Low-value pooling and immediate deductions and strata properties
When completing a tax depreciation schedule, we identify the portion of available depreciable value of common property assets using pro-rata calculations based on the investor’s unit entitlement of common areas of the property.
This results in many common property assets being classed as an immediate deduction for the owner or placed in the low-value pool in the first or second year.
Let’s use an example of an apartment complex with gym that holds a treadmill worth $1,000 and an individual investor has a unit entitlement of 1:5 from the strata plan. The depreciable value dedicated to the treadmill for this specific owner would be $200 and they can claim it as an immediate deduction.
A comprehensive BMT Tax Depreciation Schedule ensures every incentive is compliant and claimed appropriately to allow a cash boost in the earlier years of ownership. To read more about our schedules and the BMT difference, visit our website or call the team on 1300 728 726.